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08 Apr 2009
Limited negative rating actions expected
London, 08 April 2009 -- Moody's Investors Service said today that it has increased the spread
it uses to model refinancing risk for European covered bonds. This
increase was primarily driven by the continuing re-pricing of risk,
which has resulted in rising spreads on a wide range of fixed income products,
including covered bonds. Moody's does not expect a large
number of rating downgrades to result from this change.
This action is not a change in the rating methodology for covered bonds,
but an adjustment to Moody's current assumptions, which is
necessary to ensure that refinancing margins continue to be assessed in
accordance with its published covered bonds methodology.
Moody's expects that the increase to the refinancing margins will
affect 58 programmes that are not already on review for downgrade,
which comprises 35% of the programmes it rates. For 50 of
these transactions to maintain their current ratings, the implementation
of the new refinancing margins may be mitigated, on average,
by the addition of under 5% of collateral. Based on the
previous willingness of the issuers' to support their programmes
and the magnitude of the additional collateral to maintain the ratings
of the covered bonds, Moody's does not expect negative rating
actions for the majority of these programmes. However, Moody's
notes that for the remaining eight affected programmes, the increase
in the level of collateral to maintain the current ratings is expected
to exceed 10%. If no further enhancements are added to the
affected transactions, the rating impact for the vast majority of
these transactions would be a one notch downgrade. In no case is
the rating downgrade expected to exceed two notches.
When assessing the refinancing margins used in Moody's rating approach,
the primary reference points used are: i) for mortgage-backed
covered bonds, covered bond trading indices; and ii) for public
sector-backed covered bonds, trading levels for public sector
debt. Moody's also considered a number of further reference
points for this exercise, particularly where information on covered
bond trading indices and public sector debt levels was more limited.
These include individual trading prices for covered bonds, government
CDS premiums, and RMBS spread levels. Furthermore,
Moody's also made jurisdiction and deal-specific adjustments
to try and ensure a consistent rank ordering of jurisdictions, and
also to take into account deal-specific issues that may not be
reflected in data that relies on indices. In most cases the refinancing
margins established by Moody's are in excess of the current stresses
observed in the covered bond and public sector markets.
Moody's expects to disseminate a press release indicating the number
of ratings affected by this change within the next forty five days.
Following this change, the average refinancing margins used in Moody's
rating approach across some of the major covered bond markets are around:
- For mortgage-backed covered bonds: France 200bps;
Germany 190bps; Netherlands 250bps; Norway 180bps, Portugal
330bps; Spain 370bps; Sweden 210bps; and UK 350bps.
- For public-sector backed covered bonds: Austria
250bps; France 110bps; Germany 90bps; and Spain 200bps.
Refinancing margins are one of the three main determinants of refinancing
risk -- the others being the portion of a cover pool impacted by
refinancing risk and the average life of the assets in the cover pool.
A measure of the refinancing risk can be found in our performance overviews
under the heading "Refinancing and Market Risks".
The vast majority of covered bonds are exposed to refinancing risk.
Refinancing risk arises following the default of the bank supporting the
covered bond ("Issuer Default"). Following an Issuer
Default, the covered bond must be repaid from the assets backing
the covered bond. For "bullet bonds", the natural
amortisation of the assets cannot be relied on to repay the bonds.
This means that funds need to be raised against the assets backing the
covered bond, possibly through the firesale of the assets.
The discount on the price achieved to complete this sale, in the
potentially stressed environment following the default of the bank that
originated these assets, is referred to as refinancing risk.
Some markets do not suffer material refinancing risks. For example,
in Denmark, the majority of covered bonds are pass-through
bonds, which means that following the default of a bank supporting
a covered bond, the covered bonds should be able to rely on the
natural amortisation of the assets to pay them back. Pass-through
covered bonds have not been impacted by this review.
As the credit crisis evolves, Moody's will continue to review
refinancing margins and update them as appropriate.
Juan Pablo Soriano
Structured Finance Group
Moody's Investors Service Espana, S.A.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Moody's increases refinancing margins for European covered bonds
Senior Vice President
Structured Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
No Related Data.
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